Bigger Than You Think
The tax cut is not necessarily half of the president's original proposal.


David Malpass

The tax cut is still being underestimated.

As a May 23 front-page story in the New York Times points out, the $350 billion scoring total of the tax cut is unrelated to the size of the tax cut — and it doesn’t mean that the tax cut is half of President Bush’s original proposal.

In general, Congress’s deficit-scoring estimates don’t have much of a relationship to the benefits and costs of tax-and-spending legislation. They ignore the front-loading of a tax cut by using sunsets, explicitly leave out the growth impact of tax cuts, and ignore effects on asset prices (like the price increase of homes that followed the 1997 capital-gains tax cut on homes).

That said, the new tax law (see my “Tax-Cut Scorecard“) will be an important stimulus for the supply-side of the economy — including investment, production, jobs, and innovation. The law lowers the tax on capital, investment, and labor, almost by definition eliciting more of it.

Still, many people want to analyze the tax cut in terms of cash for consumers — or the demand side of the economy. Even excluding the positive effects of the dividend and capital-gains tax cuts, disposable personal income should increase sharply in 2003 and 2004 due to the income-tax rate cuts and the child-care refund.

By April 2004, disposable personal income should be running at a $9.05 trillion annual rate, up 12.2 percent from the estimated $8.07 trillion annual rate in April 2003.

One of the bearish arguments on the economy has been that disposable personal income growth is slowing. But this is misleading. The “slowdown” is due to the year-over-year arithmetic of the 2001 tax rebate and the January 2002 withholding-tax reduction. The reality is that monthly disposable personal income grew to a high level in 2002, has grown more in 2003, and is sufficient to sustain consumption growth.

The 2003 Bush tax cut will have an even bigger impact on disposable personal income.

— Mr. Malpass is the Chief Global Economist for Bear Stearns.